Step 2: How to Finance Your Real Estate Investments
You’ve defined your investment strategy and now it’s time to start thinking about how to get financing in order for your first rental property. In this step, our goal is to educate you about some of the various financing options out there and help you determine which solution is the best fit for your investment strategy. With multiple products to choose from, varying requirements and numerous approval phases to navigate, the financing process can often be very intimidating, particularly for newer residential property investors. In order to determine the best path forward, it’s important to understand your options.
So, what do those look like?
- Freddie and Fannie
- No, we’re not talking about your great aunt and uncle who gift you the awful holiday-themed sweaters every year. Rather, Freddie Mac and Fannie Mae are Government Sponsored Enterprises (GSEs) that offer longer-term investment loans. It’s important to note that there is a limit on how many GSE loans an investor may have and they also require a personal guarantee (meaning your individual credit worthiness is evaluated). These are used for the purchase of a single property (versus a portfolio) but can be a good way to get a portfolio started.
- Regional Banks
- Your neighborhood bank is another financing option. These institutions can provide you with a shorter-term loan that you may use to fund the purchase of either a single property or a portfolio. The down payment required is on the higher side (30%+) and similar to GSEs, these require a personal guarantee.
- Private Equity Lenders
- With no limit to the number of private equity loans a borrower may take out and variable loan terms ranging from 5 to 30 years, this versatile product can be used to finance the purchase of either a single property or a portfolio. The underwriter evaluates the application based solely on collateral and these loans do not require a personal guarantee.
- Hard Money Lenders
- While this option has the lowest down payment threshold, interest rates for these short-term loans is around 8%. Closing can take as few as 7 days (versus the standard 30) and the personal guarantee requirement varies.
The graphic below offers a side-by-side comparison of these products, offering a snapshot view of key differences and considerations.
Questions? Leave them in the comments! Otherwise check out the third article in this series, How to Search for Rental Property and Analyze Rental Markets.